Which retirement account is right for you? Traditional IRA vs. Roth IRA

When it comes to saving for retirement, there are a lot of options out there. Two of the most popular are traditional IRAs and Roth IRAs. But which one is right for you? Let's take a look at the key differences between the two to help you decide.

Contributions and Taxes

One of the biggest differences between traditional IRAs and Roth IRAs is how they're taxed. With a traditional IRA, your contributions are tax-deductible in the year they're made. So, if you contribute $5,000 to your traditional IRA in 2020, you can reduce your taxable income by $5,000 come tax time.

With a Roth IRA, however, your contributions are not tax-deductible. However, any earnings on your investments grow tax-free, and qualified distributions (withdrawals) from your account are also tax-free.

Eligibility Requirements

Another key difference between traditional IRAs and Roth IRAs is the eligibility requirements. To contribute to a traditional IRA, you must be under the age of 70½ and have earned income (from a job or self-employment). There is no age limit on contributions to a Roth IRA, as long as you have earned income.

However, there are income limits for both types of accounts. For 2020, if you're filing taxes as single or head of household and your modified adjusted gross income is $139,000 or less, you can contribute the full amount to either type of account. If it's more than that but less than $144,999, you can contribute a reduced amount to a Roth IRA but not a traditional IRA. If it's $145,000 or more, you can't contribute to either type of account.

contribution limits for both accounts in 2020 is $6,000 ($7,000 if you're age 50 or older).

The Bottom Line

Both traditional IRAs and Roth IRAs have their pros and cons. It really comes down to your personal financial situation and retirement goals as to which one makes the most sense for you. If you think you'll be in a higher tax bracket when you retire than you are now, a traditional IRA may be the way to go since contributions are tax-deductible and withdrawals during retirement are taxed as ordinary income. On the other hand, if you think you'll be in the same or lower tax bracket when you retire than you are now—or if you simply don't want to worry about taxes on your retirement savings—a Roth IRA may make more sense since all earnings grow tax-free and qualified distributions during retirement are also tax-free.

Ultimately, it's up to you to decide which type of retirement account makes the most sense for your individual situation. Both traditional IRAs and Roth IRAs have their pros and cons, so be sure to do your research before making any decisions. And always remember that saving for retirement is one of the most important things you can do for your financial future!